Volcker Rule may re-divide financial institutions

The Volcker Rule may unintentionally cause the re-division of financial institutions into investment and commercial banks as a result of its trading limitations.

Before the 1999 Gramm-Leach-Bliley Act, the financial industry was split between commercial banks and investment banks. Investment banks, including Goldman Sachs and Morgan Stanley, accepted less regulation under the condition that they privately finance themselves instead of relying on the Federal Reserve for financing.

With the enactment of Gramm-Leach-Bliley, investment banks were still unregulated while larger commercial banks increased trading operations and began operating more as investment banks to reduce the burden of regulation.

Under the Volcker Rule, investment banks like Morgan Stanley and Goldman Sachs would be subject to increasing limitations on proprietary activities due to mounting regulations on bank-holding companies.

According to DealBook, in 2007, Goldman Sachs reported $7.6 billion in revenue from investment banking, with $31.2 billion in revenue from trading-related operations. In 2011, Goldman Sachs generated $17.3 billion in revenue from trading-related operations.

Tumultuous conditions in the financial industry have led credit ratings organization Moody’s Investors Service to stand on high alert. Last week, Moody’s put 17 global banks, including Morgan Stanley and Goldman Sachs, on a ratings watch, citing mounting regulations and the banks’ diminished profitability.